2 April 2012

Uganda: Banks Profit Despite Gloomy Outlook

Kampala — Faced with a slowdown in loan applications due to high interest rates in the second half of 2011, banks seem to be on track to make profits.

The double digit inflation in Uganda that peaked at 30.5%, led to Bank of Uganda revising its monetary policy to target inflation that was hurting the economy. Uganda's economic growth for 2011 was also revised to less than 5% due to the economic gloom that the country was facing. The banking sector faced a bitter storm by customers who accused them of increasing monthly interest rate payments, a backlash that led to a three day strike by Kampala City Traders Association.

Profitability stays

As financial results begin to trickle in, it is noticeable that some banks have already made profits, with some recovering from losses in 2010. The criticism of commercial banks has always been that they continue to be profit making yet some of their customers are struggling to keep their businesses afloat. KCB Uganda and DFCU Bank have already announced their financial results with profits Ushs9bn($3.5m) and Ushs30.7bn($12m) respectively in 2011. KCB recovered from a loss of Shs11.3bn($4.3m) in 2010 whereas profits of DFCU surged from Ushs23bn($9m) in 2010. The total income at KCB also rose to Ushs36bn($14m) in 2011 from Ushs16.6bn($6.5m) in 2010 whereas DFCU revenues went up to UShs134bn($52.8m) in 2011 up from UShs102bn($40m) in 2010.

The reason for the increase in revenues can be attributed to various factors which include interest paid on loans and other investments. For instance interest on loans and advances for KCB rose from Ushs8.7bn($3.4m) in 2010 to Shs16.7bn($6.5m) in 2011. DFCU's accrued income of Ushs95.6bn($37.6m) in 2011 from interest of loans and advances up from Shs68bn($26.8m) in 2010. Interest rates on loans soured to over 35% for some banks as most of the commercial banks sighted Bank Of Uganda (BOU) tightening the monetary policy by keeping the Central Bank Rate closer to inflation levels.

"This performance was attributed to the growth in the loan portfolio and efficiencies realized as a result of full deployment of the Bank's new core banking platform that was commissioned in late 2010," says Sam Kibuuka, the DFCU Group Chairman.

From forex trading, the commercial banks also accrued some of the income with KCB's net income on these transactions more than doubling to Ushs6.6bn($2.6m) in 2011 up from Ushs2.9bn($1m) in 2010 whereas DFCU's also increased from Ushs3.5bn($1.3m) in 2010 to Ushs5.9bn($2.3m) in 2011.

"The good results are anchored on increased market share, strong performance from regional businesses and reduction in banks costs to income ratio due to improved efficiencies in our operations," says Dr. Martin Oduor-Otieno the KCB Group Chief Executive.

Resilient or opportunist

The bankers have always said when the economy is in a slump, they are also faced with challenges that will require them to adjust to meet their costs. Noticeable in their balance sheets, is that operational costs had gone up eating into profits. KCB Uganda's total operational rose to Ushs25.8bn($10m) in 2011 from Ushs22.9bn($8.6m) in 2010 whereas DFCU's costs went up from Ushs36bn($14m) in 2010 to Ushs42.5bn($16.7m) in 2011.

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